Arbitration = Litigation?!

In the last couple of years, several Supreme Court rulings have taken a pro-arbitration stand – whether it was to limit the scope of the Indian Arbitration Act on foreign awards, or uphold the sanctity of the arbitration agreement even if the main agreement is cancelled or to allow arbitration to continue inspite of fraud allegations. But recently, a 3 judge bench of the apex court has widened the scope of public policy grounds on which an arbitral award can be challenged…making foreign and domestic awards vulnerable to judicial intervention. Payaswini Upadhyay gets you the story.

Under Section 34 of the Indian Arbitration Act, Indian courts can refuse to enforce a domestic award if it is contrary to India’s public policy. Foreign awards contrary to India’s public policy can be refused enforcement under Section 48 of the Act.

In 2003, a 2 judge bench of the apex court in ONGC vs Saw Pipes defined public policy to say that an award can be set aside if it is contrary to

- The fundamental policy of Indian law or

- The interest of India or

- Justice or morality or

- If it is patently illegal

Dushyant Dave Senior Advocate “The problems created by Saw Pipes were innumerable. The heading of patent illegality which they brought under public policy ground was something on which every award came to be challenged before various courts. As a result of that, every award got stuck in the judicial system in India and it became impossible for matters to get decided quickly. I think Saw Pipes really stalled, if not killed, the arbitration process.”

Promod Nair

Founding Partner, Arista Chambers “The real fallout of the ONGC vs Saw Pipes case is that it converted proceedings for challenge of an arbitral award into an appeal virtually where any illegality could be alleged against the arbitral award and a challenge could be filed on that basis. The principle underlying the enactment of the Arbitration Act is very clear that an arbitral award is intended to be final and binding and can only be satisfied by the courts on extraordinary grounds. The Saw pipes decision reduced that threshold and stated that an award can be set aside if it’s patently illegal, the way it did was by interpreting the word public policy broadly.” Last month, the Supreme Court broadened it even further.

In 2001, Western Geco won a contract to upgrade an ONGC vessel. As per the contract terms, ONGC was to get the vessel delivery by July 9, 2001 but instead received it only on May 6th 2002. Western Geco had informed ONGC of this delay on October 31st 2001

While making payments to Western Geco, ONGC deducted an amount towards excess engagement charges on account of the delay.

Western Geco approached the arbitral Tribunal consisting of 3 former Chief Justices of India. The arbitral Tribunal ruled that ONGC cannot deduct the charges after October 31st as it had been informed of the delay and its cause. And so, the Tribunal attributed the delay of 4 months between November to March to ONGC.

ONGC challenged the award under Section 34 of the Arbitration Act saying it was contrary to the India’s public policy. Western Geco argued that none of the grounds under Section 34 exist to merit court intervention.

The apex court disagreed and examined the cause of the 4 months delay. It concluded that out of 4 months, ONGC is responsible for a delay of only 56 days and so, can deduct the amount for the remaining period.

ONGC had argued that under the public policy umbrella, the arbitral award was contrary to the fundamental policy of Indian law. Since that had not been defined by the apex court so far, it went on to lay down 3 principles that will define fundamental policy of Indian law

The first principle laid down by the Supreme Court is judicial approach… meaning the Tribunal should not act in an arbitrary, capricious or whimsical manner

- Two, the Tribunal should follow the principles of natural justice

- And three, application of principle of reasonableness meaning if a Tribunal’s decision is so perverse or irrational that no reasonable person would have arrived at it, then the decision cannot be sustained.

Dushyant Dave Senior Advocate

“Public policy has been expanded further; so Saw Pipes has been taken to new heights. And a result of that, I don’t think any award will be safe from attack and even a successful attack in courts in India. To my mind, this judgment has opened a complete Pandora’s Box and it is going to do a great disservice to the process of arbitration in the long run. I certainly don’t agree with the conclusions of this judgment because public policy, as a principle, is very limited in nature. It is founded on a very interesting latin expression- Ex turpi causa non oritur action-meaning no court will lend its hand to somebody who comes to the court based on immoral or illegal acts. Now it was never expected that this definition would be extended to the extent it has been done. What this ONGC vs Geco judgment does is bring the principles of administrative law into attacking awards which is wholly impressible according to me because arbitration awards stem out of contracts.”

Since public policy is a ground to challenge both foreign and domestic arbitral awards, the question is will this Supreme Court order make all arbitral awards vulnerable to judicial scrutiny?

Promod Nair

Founding Partner, Arista Chambers “In terms of foreign arbitral awards, hopefully it shouldn’t make much of an impact. There's a previous judgment of the SC in the Progetto case where the SC virtually held that unless there are extraordinary circumstances, an Indian court would not refuse to enforce a foreign arbitral award and it clearly stated that the standards for review of a domestic award stands on a different footing as compared to a foreign award, wherein a foreign award is subject to a very limited review and the scope of review in case of domestic award is wider.”

Dushyant Dave Senior Advocate

“It will apply to foreign awards which are governed by Indian law. If the law governing the contract is the Indian law, then certainly this judgment would apply even if it is made in London, Paris or Singapore. The same principle will apply as the judge sitting in England, Paris or Singapore will have to apply the fundamental policy of India on public policy.”

Most experts had expected that the next time the apex court is called to examine public policy as grounds to challenge an arbitral award, it will dilute the Saw Pipes precedent. But the Supreme Court has done quite the opposite. Interestingly, the Law Commission in its recent proposal that aims to reform the Arbitration Act has specifically noted that public policy should have a narrow meaning. It should be limited to include i) contravention with the fundamental policy of Indian law; and ii) conflict with most basic notions of morality or justice. But until that report receives the blessing of the Parliament, seems like arbitration is set to become synonymous with litigation!